Econ Exam 3 Game theory, Chapter 15-18

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  1. What is Game Theory
    • Another way of analyzing the behavior of oligopolistic firms
    • There are decision makers, rules to the game and play offs
    • The player chooses the strategies without knowing the strategy of the other
    • The solution is the "Nash Equilibrium"
    • -The best strategy given what their competitors are doing
  2. Dominant Strategy
    In game theory, the strategy that is best for the chooser no matter of what the opposition does
  3. Prisoners' dilemma
    A situation in which both choosers cannot not communicate or cooperate, so each chooses the dominant strategy (or the one that works best for them) and are left off worse then if they had cooperated
  4. Maximin strategy
    • The strategy that can maximize the minimum gain that can be earned
    • -Most attractive worse case scenario
  5. Tacitly collude
    In the case of repeated games, eventually firms may realize what is better for the actual outcome having seen it happen, i.e. choose not to advertise and each firm makes more
  6. Tit for Tat strategy
    • A strategy in which a company lets the competitor know it will follow it's lead
    • It's the opitmal strategy for getting the other player to cooperate
  7. Regulation in case of natural monopolies
    Government will force monopolist to produce higher quantities at lower prices
  8. Federal trade commision (FTC)
    • One of the agencies responsible for making sure industries don't move to far from the "perfectly competitive" outcome, or behave in anti competitive behavior
    • -Investigate the structure and behavior of firms
    • -Determine what is unlawful or "unfair" behavior 
    • -Issue cease-and-desist orders to those found in violation of antitrust laws
  9. Antitrust division (of the Department of Justice)
    • Another agency responsible for making sure industries do not stray to far from the "perfectly competitive" outcome or have anti-competitive behavior
    • -Act against violators of antitrust laws
    • -Initiates action against those who violate, decides which cases to prosecute, and against whom to press charges
  10. Anti competitive terms
    • Price fixing- competitors getting together to raise prices
    • Tying contracts- making a costumer buy something from someone else so they can buy something from you
    • Exclusive dealing- not letting your costumers buy from a competitors
    • Interlocking Directorates- When someone serves on the board for 2 competing firms
  11. Sanctions and remedies courts can impose if antitrust law has been violated
    • 1. Forbid the continuation of illegal acts
    • 2. Force the defendants to dispose of the fruits of their wrong, and
    • 3. Restore competitive conditions
  12. Criminal action in terms of violating antitrust
    Only DOJ can bring criminal charges, in the antitrust division criminal proceedings have been limited to outrageous violations, where intent to violate is clear
  13. Treble Damages
    Persons that the violation created injury or financial loss can recover damages from guilty party over and above fines levied (the fine is equal to 3x the damages)
  14. Consent Decrees
    Formal agreements on remedies among all parties on an antitrust case that must be approved by the courts, can be signed before, during, or after trial
  15. Herfindahl-Hirschman Index (HHI)
    • Mathematical calculation that uses market share figures to determine whether or not a proposed merger will be challenged by the government
    • -Base line number
    • -Sum of the squared shares
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  16. Governments role in market economies with respect to imperfectly competitive industries
    • 1. Promote competition and restrict market powers, through anti trust laws
    • 2. Restrict competition by regulating some industries. Price floors and ceilings are examples, recent intervention in banking, auto and insurance industries
    • -Usually meant to protect public, people in positions of weakness, or certain industires
  17. Capture Theory of regulation
    • Regulation should be for the public interest
    • Sometimes it serves for the interest of firms rather
    • -Result of strong lobbying groups associated with some industries
    • -Through this an industry can capture the regulators and persuade them to enact a policy that favors them (ex. set up legal barriers to entry)
  18. Trust
    shareholders of seperate firms agree to give up their stock in exchange for trust certificates that give them a share of the trusts common profits, a group of trustees then operates the trust as a monopoly, controlling output and setting price
  19. Interstate commerce commission (ICC)
    • One of the landmark antitrust legislation
    • Regulatory group, created by congress to oversee correct abuses in railroad industry
  20. Sherman Act
    • Passed by congress, declared every contract or conspiracy to restrain trade among states or nations illegal and declared any attempt at monopoly, successful or not, a misdemeanor
    • -Interpretation of which specific behaviors were legal fell to courts
  21. Rule of reason
    • The criterion to determine whether a particular action was illegal (unreasonable) or legal (reasonable)
    • -Mere size was not an offense, but behavior
  22. Clayton Act
    • Strengthen the Sherman Act, clarifying the rule of reason
    • -outlawed specific monopolistic behaviors such as tying contracts, price discrimination and unlimited mergers
  23. Wheeler - Lea Act
    Focused on advertising, changed the language of FTC to include deceptive and unfair methods of competition
  24. Per se rule
    • Now mere size is an offense
    • Declared a particular action or outcome to be an intrinsic violation of antitrust law, whether the rationale are reasonable or not
  25. Competitive Trends in the US Economy
    • 1. Pure Monopoly - one firm controls market, block entry
    • 2. Dominant Firm - one firm: more than half market share, no close rival
    • 3. Tight oligopoly - top 4 firms: more than 60% of market, evidence of cooperation
    • 4. Effective competition - low concentration, low barriers to entry, little or no collusion
  26. Why do firms exist?
    • Minimize transaction costs by making things on large scale
    • Minimize production costs- not easy
  27. Vertical integration
    • Insourcing
    • Controls several stages of production process
    • Lowers transaction costs and gives firm more power
    • But
    • -Hard to keep track of all stages
    • -Might not achieve minimum efficient scale
  28. Well Functioning market for a needed input implies
    • Quality of input is easily verifiable
    • Many producers of input product, supplier doesn't have power over you
  29. Advantages of Outsourcing
    Specialization leads to lowers prices and costs, it's cheaper than to make. Each firm does what it's best at, has comparative advantage in
  30. Disadvantages of Outsourcing
    Less control over availability and quality of input, sometimes costumers will not be confident about a product if they don't know where the input comes from
  31. Economies of Scope
    • When a firm produces a wide varity of different products
    • -When it's cheaper to produce different items in one firm
    • -Average cost per product falls as the firm produces more types of products
    • -Horizontal aspect
  32. Market Failure and it's sources
    • When resources are misallocated, or allocated inefficiently, result is waste or lost of 
    • 1. Imperfect market structure, noncompetitive behavior
    • 2. Imperfect information
    • 3. The presence of external costs and benefits
    • 4. The existence of public goods
  33. Imperfect Information
    • Asymmetric information
    • The absence of full knowledge concerning product characteristics, available prices, and so forth, 
    • Could cause you to participate in economic activity you don't want to
    • Usually the seller knows more information than the buy, like in the case of used cars
  34. Adverse selection
    • When a buyer or seller enters an exchange having more information than the seller
    • Consider Lemons problem
    • In the case of the labor market, offering lower wages will not be able to keep hard workers and maybe over pay lazy people 
    • Efficiency wage theory- high wages attract better employee's and encourage harder work)
  35. Signaling, reffering to asymmetric info in the labor market
    • An attempt by the informed side to communicate valuable information that would be otherwise hidden
    • Like good grades, good recommendations
  36. Screening, reffering to asymmetric info in the labor market
    The employer looking for signals that communicate valuable information that would be otherwise hidden
  37. Moral Hazard
    • When one party alter's it's behavior in a costly matter because it no longer costs to them
    • i.e. going to the doctor more often since insurance covers it
  38. Principal agent problem
    • When the agent's actions aren't in line with the goals of the principals
    • Often when the agent's actions aren't observed by the principal they will pursue their own goals
    • ex. You (principal) and your mechanic (agent)
    • ex. Politicians (agents) and constituents (principals)
  39. Market solutions to Imperfect information
    • -Health insurance companies getting information about "pre existing" conditions
    • -Consumers will research products in stores to determine the quality of product
  40. The winners curse
    • Like ebay, there is imperfect information, winner posts the highest bid, thinks the item is worth a lot
    • Winner can turn out to be the loser if the value of product is actually lower
  41. Behavioral economics
    • = psychology + econ = people are not robots we make mistakes
    • "bound rationality" = our brains get too full, overwhelmed by choices, prone to inertia
    • "bound willpower" ever if we know whats best for us, we are often too lazy to do so
Card Set:
Econ Exam 3 Game theory, Chapter 15-18
2014-12-03 03:31:00
15, 14, 16, 17, 18 and game theory
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